EDS Target Of SEC Investigation

EDS said it would cooperate fully with the SEC's informal inquiry and is "confident the inquiry will confirm its actions were proper.'

Rumors of an SEC inquiry began almost as soon as Plano-based EDS issued its startling earnings warning on Sept. 18. The company said third-quarter profits would be between $58 million and $74 million, down from a July forecast of $364 million, which triggered a stock sell-off.

The next week, EDS shares fell another 29 percent after two critical reports from analysts, one highlighting the sour stock-market transactions and another calling an SEC investigation a strong possibility.

EDS disclosed that it had to borrow $225 million to buy back stock options issued late last year. The transactions backfired badly when instead of rising, EDS' share price crumbled from above $70 in November to less than $20.

Prakash Parthasarathy, an analyst with Banc of America Securities, said news of the SEC inquiry would chill EDS shareholders, bondholders and customers.

Parthasarathy said further damage to EDS stock--the shares closed up $1.11 at $15.09 on Tuesday--might be modest because investors had two weeks to consider the possibility of an SEC probe.

"This will make a lot of customers nervous,' he added. "If you were thinking of signing a contract with EDS, you would rather wait before pulling the trigger.'

EDS had been hoping to announce an $8 billion contract to run back-office operations for Procter and Gamble, but the consumer-products giant hasn't made an announcement yet. EDS is also bidding on a big outsourcing contract from JP Morgan Chase bank.

EDS chairman and chief executive Richard H. Brown defended the company's financial position and denied any liquidity problems in comments last week and in a note to shareholders on Monday. He said EDS is financially secure enough to keep serving clients and to pursue new contracts, including large ones.

Brown told shareholders that the slide in EDS' share price was a "substantial overreaction' to the earnings warning.

An EDS spokesman said Tuesday night that the company would have no further statement.

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